The Utility sector provides basic services like electricity, water and natural gas to customers. Regulated and domestic-focused utility companies keep on adding, maintaining and upgrading their existing assets to provide uninterrupted 24x7 services to customers.
Utility operation is capital intensive as consistent investment is required to upgrade, maintain and replace older wires, electric poles, as well as power stations. Utilities are also investing to make their generation portfolio cleaner and lower the dependence on coal to produce electricity. Hence, apart from internal sources of funds, utilities depend on the credit market to carry on upgradation activities.
After raising interest rates nine times since the first hike in December 2015, the Fed cut interest rates thrice in 2019. In a way, the decline in interest rates will lower this sector’s cost of capital, in turn positively impacting margins. Plus, lower cost of funding will allow utilities to continue with their capital expenditure plans, thereby boosting cash flow and earnings growth.
Amid the above backdrop, let’s focus on two large Zacks Utility - Electric Power industry stocks — NRG Energy, Inc. (NRG - Free Report) and The AES Corporation (AES - Free Report) — to ascertain which is a better utility stock going into 2020.
NRG Energy currently sports a Zacks Rank #1 (Strong Buy) and has a market capitalization of $10.02 billion. You can see the complete list of today’s Zacks #1 Rank stocks here.
AES Corp., carrying a Zacks Rank #2 (Buy), has a market capitalization of $12.56 billion.
In the past six months, shares of NRG Energy and AES Corp. have gained 15% and 14.3%, respectively. The industry has gained 3.2% over the same period.
Long-Term Earnings Growth and Surprise Trend
NRG Energy and AES Corp.’s long-term (three to five years) earnings are expected to improve 39.4% and 8.5%, respectively.
Both NRG Energy and AES Corp. outpaced the Zacks Consensus Estimate in the last four quarters, with the average positive earnings surprise being 12.6% and 4.7%, respectively.
In the past 30 days, the Zacks Consensus Estimate for NRG Energy’s 2019 earnings has moved up 23.7% to $4.85. The company’s year-over-year earnings growth is projected at 101.2%.
The Zacks Consensus Estimate for AES Corp’s 2019 earnings has been unchanged at $1.34 in the past 30 days. Its year-over-year earnings growth is pegged at 8.1%.
If you are familiar with the Zack Style Scores, then it will be easy to understand the VGM Score. V stands for Value, G for Growth and M for Momentum. The VGM Score is simply a weighted combination of those scores. The VGM Score highlights the determining elements in a stock that can push the stock price higher.
At present, NRG Energy and AES Corp. carry a VGM Score of A and B, respectively.
NRG Energy and AES Corp are strong operators in the utility space that are focused on adding more clean energy sources to their generation portfolio. From the above comparisons it is quite evident that NRG Energy is currently a better utility pick.
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